Asked by Salvatore Belziti on May 02, 2024
Verified
A firm has an ROE equal to the industry average, but its price-to-book ratio is below the industry average. You know that the firm's ________.
A) earnings yield is above the industry average
B) P/E ratio is above the industry average
C) dividend payout ratio is too high
D) interest burden must be below the industry average
Price-To-Book Ratio
A financial ratio used to compare a company's current market price to its book value, indicating the market's valuation of the company relative to its equity value.
Earnings Yield
The inverse of the price-to-earnings ratio, representing the earnings per share divided by the price per share.
P/E Ratio
The price-to-earnings ratio compares a company's share price to its earnings per share, indicating how much investors are willing to pay per dollar of earnings.
- Examine the influence of financial ratios on a company's performance in the stock market and the perception of investors.
Verified Answer
CH
Cathal HewittMay 09, 2024
Final Answer :
A
Explanation :
If the firm's ROE is equal to the industry average, but its price-to-book ratio is below the industry average, this indicates that investors are willing to pay less for each unit of equity in the firm. This could be because the firm's earnings yield is higher than the industry average, meaning that investors are willing to accept a lower price-to-book ratio in exchange for a higher return on their investment. Therefore, choice A is the best answer. The other choices do not necessarily follow from the information given.
Learning Objectives
- Examine the influence of financial ratios on a company's performance in the stock market and the perception of investors.